The Reforms India Will Never Get

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The United Progressive Alliance’s (UPA) sudden executive diktat on allowing or increasing foreign direct investment (FDI) in several sectors of the Indian economy ten days ago took the Opposition (and even some of its coalition partners if rumours are to be believed) by surprise. Since then, the country and Opposition have been bitterly divided on the issue of Walmart-ification of the Indian retail market, and while little quanta of sense is heard all over, it has yet to coalesce into a clear demand from either Opposition or public (let’s not fantasise about the 4th estate here!), both of which are too fragmented to be of any use. So to put matters in the clear, let us say it – the fundamental reforms India needs at this stage is regulatory reform and transparency.

This is not to say that FDI is unwanted or even that it is unwanted at this time. The argument here is not about economic theory or populism (also known as called electoral strategy). It is about reforms in an area that makes all other reforms meaningful. If policy reforms are the bricks of the Indian economic edifice, regulatory reforms and transparency provide the mortar – and not even an idiot would try building without both. New Delhi’s initiatives are throttled before reaching full bloom because socialistic and protectionist bureaucratic procedures simply do not allow them to thrive. A very quick sample:

1. The 2008 Indo-US nuclear deal was supposed to usher in an age of energy abundance in India. Sadly, not one nuclear plant has been commissioned with a foreign partner since the deal (the Kudankulam project was entered into in 1987/8). Furthermore, foreign companies and states are apprehensive of entering the Indian market due to the nuclear civil liabilities law that India’s parliament passed. As I have argued elsewhere, it is hard to fault India’s stance on nuclear tort but a principled stance is not always possible in politics. A far easier method to bypass this logjam is the privatisation of nuclear power in India, shown to be fairly successful elsewhere. But this would require clear laws and a transparent regulatory system which the GoI has not seen fit to implement.

2. Related to the nuclear issue is the recent CAG report on nuclear facilities and procedures in India. In short, the CAG found the regulatory procedures of the Indian nuclear enclave shockingly inadequate. In light of this disturbing revelation, it is difficult not to have some sympathy for the Kudankulam protesters (even if PMANE is clueless as to what the real problems it should protest are). As I have written before, regulatory reform in this area should not only free the AERB from statutory restrictions but also bring in transparency in the civilian nuclear sector. Between such reform and those suggested in (1), it would make way for the capitalisation of a market conservatively estimated to be around $100 billion.

3. The recent FDI announcement is another such example of regulatory failure stifling policy. While FDI is welcomed, arcane regulatory laws in labour, manufacturing, and even foreign exchange hold back Indian industry from realising its full potential. Agricultural reforms are critical to spread the wealth to rural India. While everyone wants to speak on behalf of kiranas, another question is how much FDI will come in with regulations as they are right now, and how effectively rural workers – farmers, cottage industry, etc – can encash the opportunities afforded them by large retail operations. If memory serves, populism wrecked Reliance ambitions in Uttar Pradesh a few years ago.

4. The lack of full capitalisation of rural land markets has created an uncertain future for SEZs in the country. While some zones succeed in industrialisation (Sanand), others suffer an uncertain fate (Singhur, Posco project). Without fail, every SEZ land acquisition is accompanied by protests and allegations of fraud and incomplete and inadequate compensation. These delays increase costs significantly for the investors (Tata Steel’s Kalinganagar costs are said to have risen from an initial Rs. 15,400 crores to Rs. 21,000 crores due to the four-year delay) and make India a less attractive destination for business. Not only is the constitutionality of the 2005 SEZ Act questioned, but there is no clear policy articulated in it defining eminent domain and establishing compensation and redressal mechanisms. This would do much to alleviate the grievance of industries as well as local landowners. There is a reason that few of the 500+ SEZs approved by the government have come into being.

Across the board, we see policies scuttled by unclear regulation or lack thereof, if not rules outright hostile to business. In the recent Economic Freedom Index, India ranked a lowly 123rd place below even Pakistan. While India debates policy, it forgets these smaller bureaucratic creepers grown even more entrenched and nourished by IAS fiefdoms. While India may desperately need more FDI, more nuclear reactors, more manufacturing, and many more things, one can be assured that no initiative will be efficiently utilised unless laws and regulations are sorted out and the system is made transparent enough to be guarded by a watchful public. An excellent parallel can be drawn to the air force – during the Kargil War, India’s AWACS capabilities changed the face of battle. However, AWACS is quite useless without its accompanying fighter jets, and the jets are far less lethal without their AWACS support. Similarly, regulation reform is not an either-or case with any policy but a vital accompaniment which has received little attention in the media.